Oil and Gas Prices Peaking?

Larry Edelson | Thursday, June 26, 2008 at 7:30 am

No surprise from the Fed yesterday. Their feeble statements about inflation just prove what I’ve said all along: When considering deflation or inflation, the Federal Reserve will always opt for the lesser of the two evils, inflation!

Nevertheless, many of the so-called experts on Wall Street seem to think that oil and gas prices can’t go any higher … that China’s raising its domestic energy prices will kill demand … that the bull market in natural resources and the jumps in inflation are over.

I believe they are wrong. Dead wrong.

Why? All of my experience … all of my indicators … all of my proprietary cyclical and technical models tell me oil and gas prices are headed much higher … natural resources are going to double … triple and even quadruple … and that inflation has just started to break out to the upside.

Today, I’ll provide you with an update on inflation.

But first, let me give you …

Five Reasons Oil and Gas Prices Are Headed Even Higher

FIRST, the price of oil is holding firm near record highs despite seemingly bearish news that China raised its retail energy prices and Saudi Arabia would increase its oil production.

When a market fails to decline on bearish news, that’s extremely bullish. It’s anecdotal evidence of the power of the bull market in energy, and it’s also clearly visible on the charts.

Take a look …

See that massive uptrend that started in late 2007 … and was reaffirmed in early 2008? That’s a short-term uptrend that is about as powerful as they come.

Moreover, the price of oil is now higher than it was when home prices peaked and the mortgage crisis started … higher than it was when Hurricane Katrina made landfall … higher than it was when Bush released some of the Strategic Petroleum Reserves, and more.

Plus, the price of oil — even if it dips — will probably find strong support at the $110 level!

That’s one of the most powerful bull markets I’ve ever seen on the charts, and in all my studies of various indicators.

That’s not to say there won’t be pullbacks. There will be. And some will be sharp. But this bull market has plenty of power left.

Indeed …

SECOND,nothing has changed to alter the exploding demand that underlies rising oil and gas prices.

It’s certainly true that here in the U.S. everyone is talking about high energy prices. And $4-plus gas at the pump is causing many people, myself included, to make some driving and behavioral changes to reduce energy consumption. But let’s take a look at the big picture …

Over the past two years, demand for oil has grown at TWICE the average annual pace of the last decade.

According to the International Energy Agency (IEA), demand continues to rise faster than in any year since 1976!

Moreover, the IEA says developing countries could push demand up more than 40% from 86 million to 121 million barrels a day by 2030.

India’s launch of the world’s cheapest car has caused auto sales to explode across the nation of 1.1 billion people. Car penetration in India is just nine percent as compared to 89% in the U.S.

India’s oil consumption is expected to rise by nearly 30% over the next five years.

In China, oil consumption is expected to double over the next 15 years to more than 10 million barrels a day.

Speaking of China; what about the government raising its domestic retail oil and gas prices by as much as 18%? Shouldn’t that be bearish and quell demand in China?

Heck no! Beijing has raised oil and gas prices SIXTEEN times since the beginning of 2005. Did any of those price hikes hurt demand? Not one bit.

Plus, Chinese citizens are quickly learning that prices can and will rise, even in a state-run and subsidized economy. That will induce inflationary behavior, and become self-fulfilling — as consumers in China begin to buy in anticipation of even higher prices.

Are any of the above bearish for oil and gas prices? Hardly.

Bullish? You bet they are!

THIRD, there simply isn’t enough oil on the planet to meet demand. The facts …

90% of all known reserves in the world are now already in production.

Among these reserves, 80% are in their depletion phase.

10% of all oil production comes from just four large oil fields while 80% comes from older fields discovered BEFORE 1970.

Bullish? You better believe it!

FOURTH, underinvestment in refineries has not changed one iota even in the last few years.

In fact, not one new refinery has been built since 1976. Moreover, in the last quarter-century the number of refineries has plummeted by more than 50%!

I fault the oil companies for that. The bureaucrats who take so long to approve the necessary permits are also to blame.

These four factors alone provide all of the ingredients needed for an ongoing, massive, long-term boom in energy prices. But on top of these, we also have what I call …

The Fifth Dimension — possible supply disruptions caused by …

War in the Persian Gulf, the largest source of oil reserves on the planet …

Terrorist attacks, which may very well target mission-critical oil facilities …

Hurricanes …

Other man-made and natural disasters that no one can possibly predict …

Investors should never bet on the Fifth Dimension. No person in their right mind would ever plan an investment strategy based on such events — let alone get into the irrational position of actually hoping for such an event.

But that doesn’t mean these events can’t happen. As such, they are a very real possibility and need to be considered.

All this shows you just how bullish the fundamentals are for oil and gas prices … why I remain bullish … and why I believe every portfolio should have an allocation to energy investments.

Now, let me give you a rather shocking update on inflation …

I estimate that the true rate of consumer inflation in the U.S. is running between 8% and 10% right now!

Years ago when I predicted double-digit inflation would return to the U.S. no one listened to me. Most told me I was nuts. And still today, almost everyone tells me I’m crazy when I say inflation will go much higher.

Soaring inflation across America and around the world is emptying consumers’ wallets.

But what they don’t understand is this: When there is no gold standard backing the monetary system, central bankers are free to print money at will … and stir up inflation by DEFLATING the value of your money. It’s all in the name of covering up bad fiscal spending, reckless corporate behaviors, bad credit decisions by lenders and borrowers … bad debts, you name it.

Understand this one fact of today’s monetary system — and you will be several giant steps ahead of the majority of investors, protecting your money and profiting from the actions of those in charge of the monetary system.

My forecast: Real inflation, not to be confused with the government’s loony CPI figures, will likely climb to at least 20% before central bankers get serious about it.

And that’s just a conservative, broad-based inflation figure. The price hikes you will see in individual items will be much more dramatic, though they will roll from one commodity to another, playing hop-scotch with each other.

For instance, right now my models show the following commodities are about to take off like a rocket, while others go into a sideways trading mode …

Sugar, about to explode higher, and already up some 34% in the past two weeks, through June 20.

Cocoa, exploding higher NOW, hitting a 28-year high two weeks ago.

Coffee prices are about to take off and could reach new record highs in the next six months.

Cattle and hog prices: Forming a base now, will likely double in the next 12 months.

Cotton: About to make another new run to the upside, and new record highs above the $1.21 per pound level.

So, will inflation abate if the Fed continues to talk tough, or even raises interest rates? Don’t bet on it.

Best wishes,

Larry

P.S. The best way I know of to protect your wealth and profit in the inflationary environment like we have now is by investing in the natural resource markets.

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